The airline insurance market has been hardening in recent years, which led to an overall increase in premium in 2018 and 2019. At the start of 2020, the improving medium-term claims trend coupled with a more positive economic outlook, was starting to attract insurer capacity with an appetite for premium income. This had the potential to start softening the market.
COVID-19 complicated the position and changed insurance buyers’ approach.
COVID-19 complicated the position and changed insurance buyers’ approach. As 2021 progressed, the low level of activity in the airline sector meant relatively few significant claims1 and it became clear that total premium levels would create underwriting profit. This increased competition for participation on an airline insurance programme and underwriters began to compete for inclusion on airline programmes. This added downward pressure on premiums and reduced insurers’ ability to increase rates.
As 2022 commences, there is a tension between the excess capacity in the airline insurance market and uncertainty about both the economic conditions and COVID-19. Insurers are keeping a keen eye on their global market premium targets, which they have set themselves based on an assumption that activity and risk exposure in the airline industry will return to normal. This underscores how important it is for airlines and the insurance markets to build close working relationships where clear information transfer enables risk to be defined, measured and managed.
The emergence of the COVID-19 Omicron variant at the end of 2021 reminded us that the airline industry is on the front line of the defence against the spread of the virus.
Many countries have become quick to respond to threats and potential threats of infection, with travel corridors opening and closing and government requirements for inbound passengers changing at short notice. The knock-on effects for airlines are logistically complicated, with stranded travellers requiring accommodation and aircraft being grounded in a variety of locations.
Airlines that have developed proactive relationships with the insurance market have tended to have policies that are able to respond flexibly to the volatile conditions. Strategies vary according to the needs of specific airlines, but some programmes have been placed with a variety of periods, pricing structures and payment terms, based on whether their 12/24-month outlook is positive or negative.
The “one-size-fits-all” of airline insurance rating has largely disappeared.
The “one-size-fits-all” of airline insurance rating has largely disappeared. The question is whether this is a temporary measure created in response to the current uncertainty, or a longer-term change.
From 2018, hard market conditions prevailed. Rates and premiums were rising as a result of a reduction in capacity and a more disciplined market that was striving to address almost ten years of low frequency, high value losses. The market was attempting to increase the global premium income total to a point which would satisfy the needs of capital providers, but they were trying to do it in a way that didn’t attract a flood of capacity that would soften conditions to the point where claims were higher than premium. The pandemic led to a significant reduction in operational activity and the associated exposures, removing the possibility of increasing premium to a level that would balance claims if aviation activity returned to comparatively normal levels.
The reduced airline claims activity for many, but not all airline operators2, has benefitted insurers and changed the market dynamic somewhat. Airlines that suffered average or above average losses during the pandemic need to work with their brokers and insurers to demonstrate what steps they are taking to manage their risk. At the same time, airlines with an improved loss ratio must be able to show that the improvement is a result of efficient risk management, rather than simply the result of reduced operations. In each case, airline buyers should approach the market with a robust, transparent risk management strategy that is structured in a way that can be shared with the insurance markets. Insurers are trying to align their portfolios to the fast-changing conditions, so airlines need to make it clear how they are reducing risk if they want to make the most of the potential opportunities.
Insurers understand the challenges that airlines face and are most likely to be supportive when they believe that they are in a long-term, collaborative relationship with an airline.
We expect that underwriters will continue to focus on building market share and increasing income in the short-term, creating a relatively benign environment for buyers that take a proactive approach to engagement with the airline insurance market. That said, insurers will still have their own risk selection and differentiation criteria, and these are likely to be applied vigorously given the complications that COVID-19 is still having on operational activity.
Overall, it appears that the total level of premium is close to being balanced with the expected level of claims, a situation that is known in the markets as rate adequacy. In combination with the relatively high level of available underwriting capacity, we would expect the majority of renewal discussions to be positive from an airline perspective. The minority that have suffered claims are likely to need to take a proactive approach to the airline insurance markets, showing how they have enhanced their safety culture to mitigate the potential for similar incidents in the future.
This softening market trend could change as levels of airline activity return to pre-COVID-19 levels and claims volume increases.
This softening market trend could change as levels of airline activity return to pre-COVID-19 levels and claims volume increases. If this occurs, underwriting managers will focus on achieving sustainable global airline premium and potentially become more selective about the risks they support.
The market takes time to react however, and we do not foresee a significant turnaround in the short-term.
1 https://www.agcs.allianz.com/news-and-insights/expert-risk-articles/aviation-risk-report-2020-claims-developments.html
2 https://www.iata.org/en/iata-repository/pressroom/fact-sheets/fact-sheet---safety/
